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The Growing Cost of Latin America’s Natural Catastrophes

November 15, 2018

From clear seas of the Caribbean to the steep slopes of the Andes, Latin America is full of breath-taking landscapes. However, the natural forces that create those stunning scenes also strew it with hurricanes, earthquakes, volcanic eruptions, floods and storms. With the number of incidents, and their economic costs, rising in recent years, it’s become an increasingly important issue for the region. Canning House commissioned consultancy LatinNews to produce a paper exploring how Latin America can tackle natural catastrophes.

God is Brazilian, or so the joke says. But if it’s true he isn’t showing much compassion to his fellow Latin Americans. The region is particularly prone to earthquakes, with one-quarter of all recorded earthquakes measuring larger than 8 on the Richter scale taking place in western South America. Meanwhile, at the other end of the region, the Caribbean and Central America are battered by tropical storms every year.

If God is Brazilian he isn’t showing much compassion to his fellow Latin Americans…

A rough breakdown of the relative threats of each natural hazard in Latin America comes from data compiled by Matt Pritchard, an assistant professor at Cornell University. Using figures from the International Disaster Database he estimates that nearly half a million people were killed by natural catastrophes in the region in the twentieth century. Over 190,000 people died as a result of 176 earthquakes between 1900 and 1999 with the next deadliest disasters being floods, with 91,524 fatalities, volcanoes, with 67,774 and windstorms with 65,633.

That susceptibility to storms and floods is a growing problem because scientific research shows that the number of severe hydro-metrological events is on the rise. According to data collected by Munich Re, a reinsurance company, there were 710 recorded natural disasters globally in 2017 – 93% of them were weather related. That’s up from an average of less than 300 recorded events per year in the 1980s. Indeed, the tally has exceeded 600 only five times, all in the last six years.

Falling fatalities

The incidence of natural hazards around the world, and in Latin America, is increasing. But it’s important to note that a natural hazard doesn’t always lead to a natural disaster. A weak earthquake in a densely populated area, can cause more economic damage and fatalities than a powerful one in a remote location. Another factor that shapes a natural hazard’s impact is the country’s preparedness. One reason the 1985 earthquake in Mexico City killed an estimated 20,000 people, is that the country was ill-equipped to withstand or respond to it. Buildings were not earthquake resistant while the authorities lacked the plans and equipment to rescue and treat the victims. A similar quake in Mexico City 32 years later led to ‘just’ 300 deaths – a testament to how much Mexico had improved its preparedness.

The Mexico City example actually highlights a wider trend. Around the world, despite the fact that the number of natural hazard incidents are increasing, the amount of fatalities caused by natural disasters is falling. The Munich Re report recorded 10,000 deaths in 2017, slightly up on 2016’s figure, but well below the 30-year average of 53,000. That decrease is even more impressive when you consider that the world’s population has grown exponentially in that time frame.

Growing cost

But while deaths may have fallen, the financial cost of natural hazards is increasing. According to the Inter-American Development Bank, earthquakes, floods, and storms cost the region $740million in the 1940s. For the period 2000 to 2009, this figure had soared to $34billion. Exact numbers vary, depending on the methodology used, but the same trend is seen in research compiled by the UN’s Economic Commission for Latin America and the Caribbean (ECLAC). In 2012 ECLAC reported that natural disasters had cost the region over $115bn in the preceding decade, more than double the total in the ten years before that. Part of the reason is that Latin America underwent rapid urbanisation and industrialisation in the second half of the 20th century. This created poorly-planned, densely-populated urban areas that are susceptible to natural hazards. Moreover, the spread of economic development means that Latin America has far more to lose nowadays. For example, the massive expansion of the extractive industries means that something innocuous, such as a landslide on a country road can cost millions of dollars in delayed exports. Indeed, the Global Facility for Disaster Reduction and Recovery, estimates that over half of Latin American and Caribbean GDP is exposed to two or more natural hazards.

Lower-income Latin Americans more likely to live in flood-prone areas or in buildings that lack the latest anti-earthquake standards….

This cost falls disproportionately on poorer sections of the population. Lower-income Latin Americans more likely to live in flood-prone areas or in buildings that lack the latest anti-earthquake standards. They’re also less likely to have an insurance policy to pay for rebuilding. As a result, the increasing number of natural disasters exacerbates inequality, which is already a serious problem in the region. The unequal impact of natural disasters can also be seen on a country level. Wealthier countries, such as Mexico, Chile and Argentina are in a better position to cope with a natural disaster than Haiti, Honduras or Guatemala, which take a larger hit to GDP when a serious natural hazard occurs.

Mitigating the impact

The growing cost of natural disasters in Latin America, provides a strong economic incentive for policymakers to invest in the preparation and equipment needed to mitigate their impact. In the poorest parts of the region, there are plenty of low-hanging fruit for improving the resilience to natural disasters. Streamlined hurricane-resistant roofs and reinforced concrete can strengthen the cheapest of homes. While improved urban planning can prevent building in flood hotspots and overcrowding.

There are also more high-tech ways to improve the reaction to hazards. Mexico now has a system of sensors near tectonic fault lines that can send a quick warning once a quake begins. The message only arrives in the capital city 30 seconds or so before the quake itself but that’s enough for gas pipelines to be automatically shut down and lifts to stop at the nearest floor. The problem with all of these types of measures is that they require politicians to allocate funds to prevent a disaster that will probably happen once they’ve left office. Averting a hypothetical disaster is not a vote winner, which is why many natural disaster programmes are underfunded.

The most obvious tool, and an area of particular interest for UK investors, is insurance. According to Munich Re, South America suffered $4.3billion of damages due to natural disasters in 2017 but only $400million was insured. Insured losses make up just 11% of total loses on the continent compared to 55% in Australia and 35% in Europe. At present some governments issue ‘Cat bonds’ that can be reclaimed if a hazard of a certain threshold happens. But there is scope for more products and a wider adoption.

Over the coming years Latin America will be hit by a rising number of natural hazards, with an increasing economic cost. We can’t expect politicians to show foresight in funding natural disaster programmes, while individual uptake of insurance products will remain limited. However, the example of Mexico City shows that lessons are learned from natural disasters. With each new incident the call for action will increase.